Option payoff and Payoff profile Part-1..!!
Let’s continue from where we left last time and learn more about options:
Payoff is final outcome of transition and Options Payoff
has non-linear payoff characteristic.
In simple words, for buyer of an option maximum loss will face is option premium he paid for option, but in case of profit it’s unlimited. For writer payoff is exactly opposite. His profit is limited to option premium but loss is potentially unlimited.
Before discussing payoff profiles, let’s learn about position what does it mean in market?
There are two position:
1. Short Position
A short, or short position, is selling first and then buying later. The trader’s expectation is that the price will drop. The price they sell at is higher than the price they buy it at later. The difference between the sale price and the buy price produces a profit or loss. In the Forex and futures markets, a short position can be initiated at any time. In the stock market, the trader must borrow shares from a broker in order to short them. This creates a share deficient in the account. When the trader buys the shares back, the borrowed shares are returned to the broker and the profit or loss on the trade is realized.
2. Long Position
A long (or long position) is the buying of a security such as a stock, commodity or currency with the expectation that the asset will rise in value. In the context of options, long is the buying of an options contract. An investor that expects an asset’s price to fall will go long on a put option and an investor that hopes to benefit from an upward price movement will be long a call option.
So let’s proceed and dive into payoff profile from here on Uprising of Boltztrade, for example: we will use Boltztrade Ltd.
Payoff profile for buyer of asset: Long Asset
In this basic position an investor buys an asset for instance shares for 2500 and sell these shares in future date for unknown price St(share price at time t). Once it’s purchased the investor said to be long the asset.
In the above figure when price of asset is increasing greater than 2500 buyer of an asset is getting profit and when price is decreasing below price at which shares were bought at that time buyer is in loss.
Payoff profile for seller of an asset : Short Asset
In this case Investor sells Boltztrade asset at price of 2500 and in future at unknown price St(share price at time t) investor buy back asset, for this case assume asset is shares of company following graph explains profit and loss for seller.
So if seller shorts shares of Boltztrade and unknown price St is greater than 2500 then seller is in loss and if St(share price at time t) is lower than 2500 then seller is in profit of difference between 2500 and St.
Let’s keep all post short and simple no need long, hectic post. In next post that is Option payoff and Payoff profile Part-2..!! , we will finish the Option Payoff Profile and some overview of what is Trading Strategies? and how will save your Titanic from iceberg? so that Jack doesn’t have to die…till that time
Best Wishes!!
